Stock market counting on record earnings growth

U.S. Stocks at 25.8 Times Profit Means Rally May End (Sept 2 – Bloomberg)


Sept. 2 (Bloomberg) -- The best already may be over for the U.S. stock market this year.

The Standard & Poor's 500 Index, which had the worst first half since 2002, added 0.2 percent this quarter, the only gain among the world's 10 biggest markets in dollar terms. Shares in the benchmark index for American equity climbed to an average 25.8 times reported profits, the highest valuation in five years. The last time that happened, the S&P 500 fell 38 percent.

Wall Street forecasters, who were too optimistic about earnings for the past four quarters, predict income at America's biggest companies will grow by a record 62 percent in the final three months of 2008, according to data compiled by S&P.

Analyst estimates were at least 26 percentage points too high since the fourth quarter of 2007 as they failed to anticipate more than $500 billion of subprime-related bank losses and a slowing economy, according to data compiled by S&P and Bloomberg.

You have to recognize that either you live in a world where nothing makes the slightest bit of sense, or you live in a world where various prices of things are heavily influenced by officials seeking to sustain the unsustainable.

In order to believe that “investors” have collectively decided that this is the perfect time to price in a record final quarter of earnings for stocks (62%! Never been seen before!! Now?), and that the combined budget and trade deficits of the US make this a perfect time to buy the dollar, you really have to suspend some disbelief.

The way I see it, our markets are now largely out of the hands of “investors” and are mainly controlled by large trading funds, which use “black box” computers to trade the markets in a very highly-aggressive and rapid fashion. I have it on pretty good authority that there is a single hedge fund (just one) that constitutes 10% of all shares traded on any given day.

How do these black box programs operate? They sniff out trends in sub-millisecond time frames and place enormous trades, knowing, more or less, how their trades are positioned against the entire market. What would be required for official intervention to have a temporary, if not intermediate, impact? Not as much as you might think. Is it possible that officials are intervening in the midst of the largest financial crisis in several generations? Please....suspending disbelief is one thing; checking your brain at the door is another.

This is a companion discussion topic for the original entry at